Posts Tagged ‘ Greece ’

Around geopolitical events, political posturing is generally the short-term focus for all parties involved, and markets, but the longer-term implications are often unrelated to what is obvious in the short-term. The despotic approach of Vladimir Putin, and his “damn the torpedoes” approach to dealing with market/economic consequences exacerbates this effect. A fascinating take on the longer-term consequences of Putin’s bravado is detailed in the Journal of Foreign Affairs. Recent actions are presented as a negative for Russia and a positive for the Ukraine. While this will take several years to validate/invalidate, the article is provocative and provides at least a partial justification for financial markets (outside Russia/Ukraine) to come to terms with the annexation issue, and largely ignore it. Perhaps Ukraine/Russia geopolitical issues become 2014’s version of last...

European leaders have inadvertently created one of the financial world’s largest negative feedback mechanisms. By issuing long-term refinancing operations (LTRO) with cheap ECB funding for terms up to three years and encouraging European banks to take the funding and purchase assets such as sovereign debt, the ECB effectively has encouraged the European financial system to purchase and hold “money good” European sovereign debt. With cheap funding available and the ECB encouraging banks to take the money and invest/lend a situation was created where the natural buyers of sovereign debt were propped up and supported. With many of the bonds in Spain and Italy having maturities in the vicinity of 5-10 years, there is a good chance that the LTRO will need to continue for a number of years until...

Over the past week, it has become clear that a third annual conflagration throughout Europe is upon us. The crisis has morphed yet again, and like The Hydra, it has come back in a more menacing form. The issue this summer is more profound than the “sovereign debt crisis” which struck last summer. Last summer’s issues were always containable with simple resolve from the ECB. The market forced the issue in sudden manner and eventually a fix came in the form of 3-year long-term refinancing operations (LTRO). Astute observers will notice that today, sovereign debt rates, while higher, have not flared up to the levels they reached last year. European interest rates should not approach summer levels because there is a set playbook that works to contain sovereign rates...

The Spanish Empire reached the height of its powers in the 1500’s. Naval supremacy, decades of rapidly rising wealth, discovery of gold, and influence over the Catholic papacy led to Spain becoming a dominant world power. It wasn’t until Philip II and The Great Armada’s defeat against the English in the Anglo-Spanish War that Spain’s global power and sphere of influence crested. Fast forwarding 400 years, all of Europe and Spain are in a new crisis which is economic as opposed to military. As attention inevitably shifts from Greece to the next country at risk of contagion, the dynamics in Spain are likely to determine the EU-17’s future path. Spain has been through the wringer and if the country can emerge from recessionary dynamics, then all of Europe can....

The plan forward with the Eurozone crisis is the German plan forward. Germany proposed closer fiscal union and increased austerity for EU-17 nations with high deficits and/or high debt burdens. This path suits German interests well because there is little that needs to be changed. Unfortunately from Spain’s standpoint, the German path forward is not what Spain needs. This dynamic is highlighted with yesterday’s unemployment releases. Spain hit a 22.8% unemployment rate, which is an all-time high, while Germany released a 6.8% unemployment rate, which represents a new low since German reunification. It is clear that Spain needs dramatically lower interest rates relative to appropriate monetary policy set rates for Germany. It is also clear that Spain needs a drastically lower currency value relative to the currency value which...

Investing ahead of a recession is like a trip to the dentist for a filling when the Novocain isn’t quite right. You know you are in for some pain, but it’s unclear just how much, and how long it will last. Europe is accepting the German path forward, which will at a minimum, lead to plenty of pain for many countries. Spain, Portugal, Greece, Belgium, Italy, and France are all experiencing, or likely to experience, a recession. Forward looking indicators are declining, confidence is dashed, austerity being implemented, European financial assets down sharply, and interest rates higher. The ECB is taking a minimalist approach to fighting the recession and the 17 countries in the Eurozone have different agendas, interests, and policy aims. In the background of the economic recession, there...

For a number of months, the financial crisis in Europe has been explained under the guise of sound versus unsound policy. If this were indeed the case, the fix would be simple; eliminate unsound and unsustainable policy and voila, the problems would just go away. European leaders have shifted blame continuously from one problem to the next. First the issue was speculators, then Greece, then Ireland, then Portugal, then Spain, then Belgium, then Italy, then the need for austerity, then the macro economy, and now the problem has erupted to everywhere. The current set of events will hopefully amount to a positive development as it becomes clear that the problem is the construct of the Eurozone itself. Europe’s misguided attempts to reform its way out of a crisis are...

After Wednesday’s market action around the world, it’s a good time for a big picture assessment on the state of the financial markets. The attitude out of Europe has pendulated between nonchalance and vitriolic attacks among the EU-17. Italian sovereign rates spiraling above 7% have brought the eleventh hour upon the region. Escalation of the crisis has caused all types of forward looking investment to become somewhat of a farce. The environment of complete and utter policy uncertainty will no longer be withstood by markets as the full scale part of the European financial crisis enters its fifth month. After bungling the first few opportunities to implement a fix, it has become clear that dramatic action will be required to keep the Eurozone intact. The problems of the Eurozone’s...

The markets have been through a period of wicked volatility with a significant pullback almost to the point of entering a new bear market. Intraday the S&P 500 was down 20% from its high but closed above those levels and went up from there. From the market’s closing bottom of 1,099 the S&P had a tremendous move higher up about 17% in 4-weeks. During this period, the market maintained an obsession with day-to-day and even hour-to-hour news. The situation becomes impossible for investors because the news flow is utterly unpredictable and investors can get whipsawed and hacked up quite easily. Often the market is described as a voting mechanism for 6-9 months out. Understanding that this is the normal state of things will be important at some point in...

After keeping the world on edge and pushing up against the brink of a European recession, details of the European fix are trickling out. It is sure to be a headline filled Thursday, Friday, and weekend. I won’t focus on the specific details because many of them still aren’t known and the ones that have been announced are likely to evolve regardless. Europe has recognized the enormity of its financial crisis. The European financial system couldn’t fund itself, sovereign interest rates started to spiral out of control, and the Euro experienced a rapid and unhealthy correction. It seems absurd to highlight that Europe recognized that this was collectively a very big problem but at times, even right up until the end, European leaders at any moment could seem either...

Positive data and developments on the real economy front are being ignored while increases in financial stress are being focused on. The pervasive gloom in the financial markets is a result of growing fears of another financial crisis. If this were to unfold, the financial crisis would surely cause a global recession but I’m remaining in the camp that a global recession can be averted if financial conditions stabilize. Financial conditions fully reflect the jitters of market participants or investors. Numerous sets of survey data reflect low levels of investor confidence which are being reflected in yield spreads, short-term funding markets, and stock markets around the world. While the stress is nowhere close to the degree it hit during the Lehman event, it is worrisome nonetheless. The source of...

Greece will ultimately stay on board. There I’ve said it – and it is really what I think will happen. There were a number of “unity” headlines hitting over night which have led to a continuation of the rally in global risk assets. Emerging Markets which looked sufficiently panic sold to call out yesterday are up 3-6% across the board. Major stock markets in Europe are up 3-4%. At risk of sounding Pollyannaish about the whole episode it appears to me that Greece and the rest of the Eurozone are coming to terms and seeking out a middle ground which avoids the suicide option. My thesis for the past month has been that this looming crisis is avoidable across the Eurozone because it has morphed into a crisis of...